Tax Hikes Sound Big But Are Not Really So

ByDavid R. FrancisFebruary 19, 1993

PRESIDENT Clinton did something unique in his State of the Union message Wednesday. He proposed deficit-cutting measures that will more than pay for his own spending goals - such as more money for infrastructure.

"Refreshing," says Charles Schultze, a budget director under President Johnson, now with the Brookings Institution. "We never had a president do that."

Mr. Clinton's budget numbers sound so big. A $500 billion program of tax increases and spending cuts over four years. Some $126.3 billion in higher income taxes from 1993 through 1998. New energy taxes are to raise $71.4 billion, starting in mid-1994.

But taxpayers, corporate and personal, will send only about 1 percentage point more of national income to Uncle Sam. Michael Keran, chief economist of Prudential Insurance Company of America, reckons that by the time the dust from the multiple budget changes settles down, Americans will be paying an extra $75 billion to $80 billion in taxes in 1997. That will boost federal revenues as a proportion of national output to around 20 percent from 18.6 percent last year. That share has never dropped below 17.4

Within Clinton's package, of course, the well-to-do will be hit harder. These are the people that prospered in the 1980s.

The jump in the federal deficit from 0.2 percent of gross domestic product (GDP) in 1965 to 4.9 percent in 1992 is entirely explained by the rise in federal spending, notes Lawrence Kudlow, a Reagan-era budget office economist now with Bear Stearns &amp; Co. Excluding deposit insurance, federal budget spending as a share of GDP has increased from 21.7 percent in 1988 to a peak of 24.3 percent in 1983, dropped to a recent low of 21.7 percent in 1989, and moved back up to 23.5 percent last year.

"Notwithstanding the rhetoric about savage Republican budget cuts, the real rate of growth of the domestic budget since 1989 has been more than 7 percent per year - the fastest four-year expansion of the budget in 30 years," note CATO Institute economists William Niskanen and Stephen Moore in a new book, "Market Liberalism: a Paradigm for the 21st Century."

Washington politicians, faced with "special interests" that, in total, make up a majority of citizens, are keen to cut spending in general but reluctant when it comes to specifics.

Republicans are attacking Clinton's 150 spending cuts as inadequate or fake. "I want to hear their proposals," says Gary Burtless, another Brookings economist. "They have held office for 12 years." He regards the Clinton plan as "about right."

Messrs. Niskanen and Moore do offer a general plan and specifics. In general, if the federal government kept the growth in spending to the inflation rate for five years, this would just about eliminate the deficit. Revenues normally increase faster than inflation and thus would catch up with spending. "That's my diet cola plan for the government," Moore says.

A more specific plan includes defense cuts, a reduction in the rate of increase of real Social Security benefits for future retirees, a sequester of 4 percent of all domestic outlays in the second half of fiscal 1993, a reduction in medical and other outlays. The two also list cuts in 50 programs described as "low priority." But many of these cuts would cause political storms in Washington.

Some state governments have managed to keep real spending flat in the last two years or so, Moore notes. Michigan, Massachusetts, and Virginia are examples.

When the tax increases, tax cuts, spending reductions, and extra outlays are added up and netted, the Clinton program won't have much of an immediate impact on the $6 trillion US economy, Mr. Keran says. The energy taxes that hit the middle class take effect only in 1994, but the income tax boosts on the well-to-do will begin to bite this year.

Anticipation of deficit reduction has already prompted a cut in long-term interest rates to just above 7 percent, says Keran. "They might have been otherwise 7.8 or 7.9 percent."

Keran describes health-care costs as "the achilles' heel of deficit reduction." When President Bush accepted tax hikes equal to almost 1 percent of GDP in 1990, health-care costs ate virtually all the revenue gains in two years. Clinton recognizes the danger.